New hydropower policy could be last chance for revival of neglected sector

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Six days before the dates for the general elections were announced, the government announced a hydropower policy that had gone through years of debate. The last-minute passage of the policy together with approvals for four power projects worth Rs 31,000 crore could be seen as an effort to revive the power sector and help India meet its climate change targets, since hydropower will be counted as renewable energy.

India currently has 45,400 Mw of installed hydropower capacity, 13 per cent of the country’s power generation capacity. Compare it with the government-owned NTPC’s 41,580 Mw of coal-based power generation, and it becomes clear why there was a need for a focused hydro-power policy in the first place. 

“It’s better late than never. In fact, the policy is opportune and is likely to infuse life into some of the projects that were on the back burner due to commercial viability issues. The measures are a fallout of the required grid stability because of the intermittent nature of solar and wind power. It shows the government’s concern to address the issue in advance,” says Balraj Joshi, chairman and managing director, National Hydroelectric Power Corporation. The public sector undertaking operates 6,971 MW or 15 per cent of the total hydropower capacity.

According to the government, India has hydropower potential of 1,45,320 Mw but in the past 10 years only about 10,000 Mw has been added. The share of hydropower in total capacity has declined from 50.36 per cent in the 1960s to around 13 per cent in 2018-19. “Just as solar and wind, a similar push is required for hydropower because it is a capital-intensive sector,” says Prashant Jain, chief executive officer, JSW Energy.

Hydro-power’s status as renewable energy allows for a hydropower purchase obligation (HPO) on the power distribution companies, which will have to meet a fixed percentage of their power demand from hydropower. The HPO guidelines will need to ensure that it does not come at the cost of wind power since it will be part of the non-solar renewable purchase obligation. “This is critical. Distribution companies will be obliged to buy and more power purchase agreements (PPAs) will take place. This will also help in financial closures,” says Jain. 

Besides HPO, the new policy provides for direct budgetary support for infrastructure creation and flood control. Enabling infrastructure — such as roads and bridges — will get funds up to Rs 1.5 crore a Mw for up to 200Mw projects and Rs 1 a Mw for above 200-Mw projects. “The budgetary support for flood control and connecting infrastructure will reduce the capital requirement and make it easier to finance the projects,” says Kameswara Rao, partner, PricewaterhouseCoopers. 

The policy also provides for tariff rationalisation measures including providing flexibility to developers to determine tariff by back loading it after increasing the project life to 40 years, increasing the debt repayment period to 18 years and introducing escalating tariff of 2 per cent. Joshi says this will bring more projects in the “commercially viable” bracket and they will now be taken up. 

JSW, for instance, is hoping that its 240Mw Kutehr project on the Ravi in Himachal Pradesh is able to benefit from the tariff rationalisation measures. 

For NHPC, Joshi says these measures will boost its portfolio besides helping other developers, especially its new projects in the north-east will benefit from the assistance for infrastructure and flood moderation where these aspects form a sizeable part of the project cost.

Private sector interest, however, may not be easy to come, especially since hydropower projects face huge resettlement and rehabilitation issues besides protest on environmental grounds. The policy is silent on these issues. 

According to Joshi, it will take some time for the private developers to come to terms with the uncertainties and difficulties associated with hydropower projects and the requirements of meticulous planning in dealing with these aspects to deliver the projects. “It is for the developers to address the issues of all stakeholders in terms of the guidelines. More often than not, it is the lack of will to address these issues that leads to public resentment and consequent effect on the project. The developers have to define and adopt R&R strategies in all honesty and in a spirit of sharing,” he says. Jain, however, says the social and environmental issues are mostly state-level challenges and need to be addressed on case-to-case basis. 

From a private developer point of view, one crucial incentive missing from the policy is interest subvention. Jain says construction cost is heavy and it takes six to seven years to build a project. If the interest cost during construction comes down, then the cost of power comes down substantially. “PPAs and HPOs are the keys for financial closures to happen but if there is some degree of interest subvention during the construction phase, the cost will come down and distribution companies will buy power. This will be a big boost for the hydropower sector in future,” he says. The private sector accounts for 3,394 MW of hydropower capacity, just 7 per cent of the total of 45400Mw. 

In the absence of storage and hybrid technology finding wide application, hydropower and gas based generation are needed for tackling the intermittency of renewable power that is expected to touch 170Gw by 2022. The policy marks an attempt to lower costs and incentivise distribution companies to buy hydropower. Much, however, will depend on the policy details. This, after all, could be the last chance for hydropower to grow after years of flat or no growth.

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